We model the multitasking nature of managerial incentives when ESG metrics are
introduced jointly with standard financial or accounting metrics in executive
compensation. Building on insights from multitasking theory, we predict that
pay-performance sensitivity or dollar delta of standard metrics should optimally
decrease when value-adding but less measurable ESG goals are introduced in executive
pay. Empirical tests support the existence of a significant opportunity cost for the
effort of executives to improve ESG metrics that firms mitigate by decreasing
incentives to achieve standard metrics. Consistently, the downward adjustment in
dollar delta of standard metrics is shown to be larger when the number of ESG metrics
increases, they are less material to the firm, or less measurable. This adjustment is not
offset by a simultaneous increase in the time vesting delta or the executive’s total
compensation. The tests show differential effect of E, S, and G metrics on the dollar
delta of standard metrics. In sharp contrast, there is no variation in the dollar delta of
standard metrics when a new standard metric (instead of an ESG metric) is
introduced. Overall, the evidence is consistent with efficient contracting in the
presence of multitasking when ESG metrics are introduced in executive compensation.